Sunday, November 28, 2010

Instead of just complaining about how bad things are, as I was this morning in What If The Banks Failed, I will take a moment to be constructive and answer the question: "Okay, Mr. negative talk, how would you do things differently?" Here is what I would do:

The top 4 Too Big Too Fail banks have a stranglehold on our economy. They are insolvent and they are sitting on cash waiting to take losses, but they are not forced to take their losses because of the new accounting changes. Therefore we have an economy that is artificially held up and cannot recover. Real estate; commercial and residential, stock prices, and corporate debt are artificially too high which will not allow the system to cleanse and recovery to begin.

So here is what I would do:

The President announces a comprehensive plan alongside the Federal Reserve detailing all steps that will be put in place in order to stem any panic before the program begins:

1. All checking and savings deposits around the country are 100% backed by the Federal Reserve and Treasury. If your money is at a bank that fails, your account will be government owned until a new bank takes over your deposits. (This already happens every week and is run by the FDIC)

2. All money markets and CD's at banks will be 100% backed by the Federal Reserve and Treasury. The money markets must have been created before this announcement is made.

3. The mark to market rule goes back into effect immediately. Banks must be forced to write down losses and if they do not have the cash to cover then they must enter bankruptcy. The bad debt for the largest banks will be handled by the government and FDIC in the Resolution Trust Corporation II (the first was in the early 90's) where the assets are sold into the market place at free market prices.

4. Fannie Mae and Freddi Mac enter bankruptcy. Their portfolio is liquidated as part of the Resolution Trust Corporation II.

5. A new budget program is announced slashing the major entitlement programs, military spending, and creating a real solution to future debt repayment.

6. $500 billion in a new stimulus package will be given to a group of the next 30 largest banks that are healthy. They did not participate in the subprime debacle, and they have a clean balance sheet.

What would happen?

Many bankers, stock brokers, traders, mortgage lenders, and employees at the Too Big Too Fails would lose their jobs. Where would they work? At another healthy bank.

The stock market would most likely fall sharply finding a free market price and presenting a strong buying opportunity.

Residential real estate and commercial real estate prices would fall sharply as the supply was allowed to enter the system finding a free market price and presenting a strong buying opportunity.

Our currency would fall sharply on the news but find a bottom as foreign leaders understand that we are taking steps to begin recovery. There would be outrage from foreign countries over the losses taken on Fannie/Freddie debt. People say they will respond by dumping treasury debt. I say, no they won't, it is more likely they become a buyer of our newer stronger debt. Our weaker currency would help balance the global market place as we can once again focus on exports and being competitive.

The loss of Fannie and Freddie would cause mortgage rates to rise sharply. Buyers would also be forced to put down a large down payment to purchase. Loans would come from the $500 billion in cash sitting on the balance sheets of the new banks. No homeowners would live on the streets. They would rent in the 40 month supply of homes that would be purchased by investors and business people who have real capital available to purchase assets.

The $500 billion in stimulus money would not sit on the new bank's balance sheets to cover future losses. It would be lent out into the market to investors who want to purchase the correctly priced assets. It would be lent to business people who want to start a business and create jobs. It would be lent to companies focused on developing new technology and health care research so America can once again have value with our trading partners.

This is how America was designed when we arrived on these shores, and it is sad that it is no longer the free market capitalist country that created more prosperity and wealth than any other country in history.

This solution will never be discussed in a serious way by our leaders. Both the democrats and republicans receive MASSIVE checks every year from the too big too fail banks and those checks determine the decisions our leaders make.

Where is free market capitalism seen today in the world? Ironically, it is now practiced most commonly in communist China.

If your children have the opportunity to learn the mandarin language in school I would push them hard to take the courses. They are growing up on a sinking ship, and the opportunities this century to prosper in China will be limitless.

As the IMF prepares to send in the Trojan Horse this evening to "save" Ireland banks, people are starting to wonder what would happen if some banks around the world were actually forced to take some losses and not give out record tax payer paid bonuses this year?

That answer can be clearly seen in the example of Iceland, a country whose debts overwhelmed them during the financial crisis but decided not to bail out their banks.

In a Bloomberg interview this week their president discussed some of the "horror" of life in his country where his people do not send their hard earned taxes to banks to pay out record bonuses. Brace yourself:

Iceland’s President Olafur Grimssonsaid his country is better off than Ireland thanks to the government’s decision to allow the banks to fail two years ago and because the krona could be devalued.

“The difference is that in Iceland we allowed the banks to fail,” Grimsson said in an interview with Bloomberg Television’s Mark Barton today. “These were private banks and we didn’t pump money into them in order to keep them going; the state did not shoulder the responsibility of the failed private banks.”

Iceland’s banks, which still owe creditors about $85 billion, were split to create domestic units needed to keep the financial system running, while foreign liabilities remained within the failed lenders.

As a consequence, “Iceland is faring much better than anybody expected,” Grimsson said.

“How far can we ask ordinary people -- farmers and fishermen and teachers and doctors and nurses -- to shoulder the responsibility of failed private banks,” said Grimsson

Wait a minute? I don't understand?

Iceland let their banks take losses? They split their banking units and allowed the bad debt to be liquidated? And......

There is still a country there? It did not explode as we have been told will happen here in America?

How unfortunate for their people that they are not taxed to pay for a Goldman Sacs and Bank Of America to give out exorbitant pay.

Fortunately, there will be no more Iceland "tragedies" moving forward as the IMF (a group of bankers) is sending in the Trojan Horse to Ireland (to save the bankers) as we speak.

"We should be careful to get out of an experience only the wisdom that is in it and stop there lest we be like the cat that sits down on a hot stove lid. She will never sit down on a hot stove lid again and but she will never sit down on a cold one either."

- Mark Twain

"It's waiting that helps you as an investor, and a lot of people just can't stand to wait."

- Charlie Munger

"Live as if you were to die tomorrow. Learn as if you were to live forever."

- Gandhi

"One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do. I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I wait for a situation that is like the proverbial shooting fish in a barrel."

- Jim Rogers

"Capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich."

- James Grant

"At this juncture, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained."

- Ben Bernanke, March 2007

"Everything that needs to be said has already been said. But since no one was listening, everything must be said again."

- Andre Gide

"When people are getting richer and richer but they're not actually producing anything, it can't end well."

- Louis CK

"In economics things take longer to happen than you think they will, and then they happen faster than you thought they could."

- Rudiger Dornbusch

"I don't write about what I know. I write to find out what I know."

- Patricia Hampl

"Chains of habit are too light to be felt until they are too heavy to be broken."

- Warren Buffett

"Everyone has a plan until they get punched in the mouth."

- Mike Tyson

"Interest on the debt grows without rain."

- Yiddish Proverb

"You can have comfort, or you can have value. You cannot have both."

- Jim Grant

"Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful."

- Warren Buffett

"No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as attempt to remedy a present ill by sowing the seeds of a much greater ill for the future."

- Ludwig von Mises

"Men who can both be right and sit tight are uncommon."

- Jesse Livermore

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

-Ludwig von Mises

"Most investors think quality, as opposed to price, is the determinant of whether something's risky. But high quality assets can be risky, and low quality assets can be safe. It's just a matter of the price paid for them."

- Howard Marks

"Whenever you find yourself on the side of the majority, it is time to pause and reflect."

-Mark Twain

"None are more hopelessly enslaved than those that falsely believe they are free."

-Goethe

"The longer the markets disobey basic rules of valuation, the bigger the opportunity for good investors to reap the benefits. Value investing works precisely because markets become dysfunctional at times."

-John Coumarianos

Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.

-Sir John Templeton

"No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as attempt to remedy a present ill by sowing the seeds of a much greater ill for the future."

- Ludwig von Mises

"People only accept change in necessity and see necessity only in crisis."

-Jean Monnet

Requiring a central bank to print money to increase government's purchasing power invariably ignites a hyperinflationary firestorm. The result through history has been toppled governments and severe threats to societal stability.

- Alan Greenspan

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."

- Henry Ford

"Do you want to sell sugared water for the rest of your life? Or do you want to come with me and change the world?"

-Steve Jobs

"I'd be a bum on the street with a tin cup if the markets were always efficient."

-Warren Buffett

"The market can stay irrational longer than the investor can stay solvent."

- Keynes

"While the government struggles to save one crumbling enterprise at the expense of the crumbling of another, it accelerates the process of juggling debts, switching losses, piling loans on loans, mortgaging the future and the future's future. As things grow worse, the government protects itself not by contracting this process, but by expanding it."

-Ayn Rand, 1974

"The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function."

- F. Scott Fitzgerald

"All our life, so far as it has definite form, is but a mass of habits - practical, emotional, and intellectual - systemically organized for our weal or woe, and bearing us irresistibly toward our destiny, whatever the latter may be."

-William James

"Men it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."

-Charles Mackay

The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge.

- Stephen Hawkings

"Give me control of a nations money supply, and I care not who makes it's laws."

- Amschel Rothchild

Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead. We must therefore accept it without complaint when they sometimes collide with a bit of reality against which they are dashed to pieces.

- Sigmund Freud

Many of life's failures are people who did not realize how close they were to success when they gave up.